Dollar will trouble RBA

The Reserve Bank of Australia will come under renewed pressure to intervene in foreign exchange markets this year, as central bank demand for the Australian dollar remains strong.

The proportion of global allocated foreign exchange reserves held in “other" currencies increased from 4.8 per cent in the September quarter of 2011 to 5.5 per cent in the same quarter of 2012, the International Monetary Fund’s latest currency composition of official foreign exchange reserves (COFER) data shows.

The “other" category is thought to be dominated by Australian and Canadian dollars, and the IMF is considering separating the currencies into their own categories in future reports because of their increasing popularity with central banks.

National Australia Bank global co-head of foreign exchange strategy Ray Attrill estimated that the Australian dollar accounted for 2.25 per cent of global foreign exchange reserves in the September quarter, and central bank demand in the order of $13 billion. “This means that demand for Australian and Canadian dollars by reserve managers rose beyond what would have been associated with pure reserves rebalancing needs," Mr Attrill wrote in a note to clients.

The demand puts upward pressure on the value of the Australian dollar, while central banks such as the United States Federal Reserve are actively devaluing their currencies.

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The Australian dollar held steady at close to $US1.04 on Tuesday despite negotiations to avoid the fiscal cliff in the US.

The RBA conducted a form of “passive intervention" in August to October last year by selling Australian dollars from its own coffers off-market to another central bank or institution, thought to be the Swiss National Bank.

But resorting to aggressive on-market intervention of the like seen during the global financial crisis is not the RBA’s only option if it thinks it needs to bring down the Australian dollar in 2013.

It could simply accelerate the kind of off-market activity it had been doing in 2012, ANZ Banking Group foreign exchange strategist Andrew Salter said.

“If the Australian dollar were to appreciate to $US1.10 or $US1.15 absent an improvement in Australian domestic fundamentals or commodity prices themselves, I think that would constitute a stronger case for the RBA to take a more active role on the exchange rate," he said. “I think when I say ‘active’ I mean a greater pace of reserve accumulation relative to what we saw in August through to October."

The RBA could act anonymously through a third party, Mr Salter added.

A fixed exchange rate modelled on the example of the Swiss National Bank has been all but ruled out by RBA governor
Glenn Stevens
, who has warned of the massive spending it would entail.

Bank of America Merrill Lynch chief economist
Saul Eslake
warned against the RBA dipping into the currency markets at all and suggested looser fiscal and monetary policies were an alternative.

Exchange controls would never be an accepted tool, he said.

“The key question is not could they do a bit more. Yes they could, but would they have any impact? No it wouldn’t," Mr Eslake said.

“Are there lots of risks associated with doing enough to make a difference? I would say yes, in spades.

“I think [exchange controls are] very dangerous territory for Australia or any other advanced economy to be contemplating. For a country running a current account deficit, that’s a highly risky thing."

Total global foreign exchange reserves measured by the IMF reached a record high of $US10.8 trillion in the September quarter of 2012.